TAKING A FIRM STANCE

RBI's action against select NBFCs aims to curb the risks of growth at any cost before it jeopardizes the entire system

Over the last few months, the Reserve Bank of India (RBI) has been sensitizing the country’s lenders through various channels on the need to be prudent in their operational and compliance practices.

However, on 17th October, the central bank took a more specific step and barred four NBFCs - Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv Limited - from issuing further loans. From the RBI’s perspective, a tighter approach was necessary to protect customer interests and maintain sectoral health.

While unfair and usurious practices were noticed during the course of RBI’s onsite and offsite examinations of these NBFCs, many are wondering if there are more such NBFCs that might meet this fate. Broadly, there are concerns about the sector’s future growth if tighter norms are eventually applied to the entire space.

It’s worth pointing out that sector fundamentals are currently strong, and the initial commentary from experts following the RBI’s move suggests that the directive to these four NBFCs is specific and does not signal any systemic concerns. Therefore, the move is unlikely to affect the entire sector.

However, the rapid growth of NBFCs in recent years and the increasing risk perception of the sector necessitate efficient regulation. Currently, the NBFC sector holds a significant 22% share of the credit market, alongside banks, NBFCs, and AIFIs.

It’s also worth remembering the aftermath of the debt default of Infrastructure Leasing and Financial Services Ltd (ILFS) in 2018, which led to a liquidity crunch and made credit more expensive for the entire sector, thus negatively impacting the fundamentals of the NBFC space.